Why U.S. Treasuries are No Longer the Safest Investment in the World

The world’s a humbling place.  It’ll change right before your very eyes and you don’t even know it…until it’s too late.  Where markets are concerned this can be an expensive and chastening lesson.

Not long ago it was common knowledge that ‘house prices always go up.’  This key insight spread across the land like wildfire.  Everyone just knew it was true.  But, in a great way, it was true until just the moment it wasn’t.  That’s when the impossible happened – house prices went down.

Before that everyone knew that all you had to do to retire a millionaire was ‘buy and hold’ an S&P500 index fund.  It was mindless and fantastic.  Any idiot with a 401K could do it. Then again, that was before the stock market whipsawed true believers for over a decade running.

These days everyone who’s anyone knows that ‘U.S. Treasuries are the safest investment in the world.’  In fact, on Tuesday, as if to prove the point, something happened that has never happened before – Ten-Year Treasury yields fell to 1.91 percent.  In other words, people are so confident in the U.S. government they’re willing to loan them their hard earned money for 10 years, for practically free.

Here at the Economic Prism we watched in shock and disbelief.  Has the collective mind of investors gone mad?

We are confident the answer to this question will soon be revealed.  We are also confident that U.S. Treasuries are no longer the safest investment in the world.  The lunkheads just don’t know it yet.

But we suspect that’s not all there is to it.  What else could be pushing treasury yields so low?

The Market is Pricing it In

Back in 1961, when John F. Kennedy was President, the Federal Reserve executed “Operation Twist.”  In short, the Fed sold short-term debt and bought longer term debt, thus narrowing the yield between two and ten-year Treasuries.

Several months ago the Fed regional bank in San Francisco noted that Operation Twist produced a 0.15 percentage point reduction in long-term Treasury yields.  Who knows if the Fed will engage in this heavy handed market intervention and manipulation again, but the mere mention of it may be affecting debt markets.

Earlier this week Bloomberg reported

“The Federal Reserve may buy $520 billion of longer-maturity Treasuries while selling shorter-term U.S. debt, pushing the 10-year yield to as low as 1.6 percent, according to CRT Capital Group LLC.

“The Fed’s $1.64 trillion of holdings of Treasuries includes $520 billion of debt maturing in 2014 and sooner, which could be sold and reinvested in securities due between 2018 and 2039 in order to raise the duration of the central bank’s government debt portfolio to 7.4 years from 4.9 years, CRT strategists David Ader and Ian Lyngen wrote in a note to clients today.

‘“The market is pricing it in,’ Stamford, Connecticut-based Ader said in a telephone interview.  ‘Things seem to be on the edge of breaking down.  The Fed feels it wants to do something, or at least acknowledge it still has some tools in its box to keep hope alive.’”

Why U.S. Treasuries are No Longer the Safest Investment in the World

No doubt there are consequences for artificially suppressing interest rates.  For one thing, it encourages more debt and discourages savings.  It rewards spendthrifts, like the U.S. government, and punishes savers for living within their means.  Moreover, it ensures that the economy lumbers along like a lethargic dog.

The zealots at the Federal Reserve and the Treasury cling to the belief that if they can just get consumers to buy stuff they will usher in the new paradise.  They can’t comprehend that the once almighty consumer no longer wants to shop until they drop.

“Even taking into account the many financial pressures they face, households seem exceptionally cautious,” said Fed Chairman Ben Bernanke at a speech yesterday to the Economic Club of Minnesota.

It doesn’t matter to the hacks manning the monetary and fiscal levers that consumers are done.  The Fed and the Treasury will go about undermining government debt until something finally gives.  Either the economy improves or debt markets blow.  We think it’ll be the latter.  For they won’t stop until they succeed.

That’s why U.S. Treasuries are no longer the safest investment in the world.

Sincerely,

MN Gordon
for Economic Prism

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One Response to Why U.S. Treasuries are No Longer the Safest Investment in the World

  1. Pete says:

    According to Zero Hedge, countries outside of the U.S. dumped 74 billion dollars in U.S. Treasuries, most of it over the weekend:

    “Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed’s custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: “the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.” In hindsight the Occam’s Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. (Source)

    Undoubtedly, the Chinese and other countries have recently discovered that Italy and Greece, with smaller debt to income ratios than the United States, are less riskier and carry a higher rate of return. This is because, unlike the US, the Rothschild/Rockefeller bond rating agencies have trashed their country’s debt ratings, forcing them to pay a much higher interest rate than U.S. Treasuries. Hey, if you take the risk, you might as well earn the reward!

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